Buffett: The Making of an American Capitalist
Currently the second wealthiest person in the world, Warren Buffett is also arguably the greatest investor in history. In five decades, he has parlayed a stake of less than $100,000 into $35 billion. Shares in his company Berkshire Hathaway trade in their tens of thousands of dollars, and Buffett himself has 474,998 of them - none of which he has ever sold.
His investing strategies have been extensively written about, but what broad lessons for success can we draw from the man himself? Lowenstein's biography is the only serious full-length portrait, and it is from this richly enjoyable book that we glean the following.
Seeds of a fortune
Omaha, Nebraska was wilderness until the 1850s, but grew into a town once Abraham Lincoln designated it the eastern terminal of the Union Pacific Railroad. Boiling in summer and freezing in winter, it had the reputation as a cultural wasteland.
The Buffetts had been in Omaha for over a century when Warren Buffett was born in 1930, into modest circumstances. Buffett's father Howard had wanted to be a journalist but worked in a bank, which retrenched him in the Depression. The family had so little money that Warren's mother often skipped her dinner to give her husband a full portion. This period of lack apparently had a big effect on Warren. The second of three children and the only son, he was obsessed with numbers and facts and confessed very early on his desire to be rich. A favourite boyhood book was One Thousand Ways to Make $1000.
Howard Buffett eventually ran a successful stock brokerage and also achieved a surprise election to Congress in 1942 as a Republican. Young Warren hated living in Washington, but took pleasure in building up newspaper rounds which, while he was still a teenager, were bringing in $175 a week (a regular adult wage); the $6,000 he saved was the seed of his fortune.
He did well in school, coming 16 out of 374, and attended the Wharton School of Finance at the University of Pennsylvania. He applied to Harvard for further study, but was turned down. This turned out to be a great blessing in disguise, because at his second choice, Columbia, was Benjamin Graham, the genius pioneer of stock market analysis.
Entering the fray
Until Graham, stock picking had basically been gambling, but the professor gave it a methodology that the young Buffett instantly 'got'. As Lowenstein puts it: "Investing without Graham would be like communism without Marx - the discipline would scarcely exist." Graham's method was the opposite of speculation; he looked for the underlying value of a stock and for discrepancies between this value and the stock price. If you bought a stock very cheaply, it could be virtually free of risk. The emphasis on research, analysis and looking only to the facts of a business, suited Buffett's personality perfectly; he could work alone.
Although Buffett's father warned him against entering the stock market, he started working in his father's brokerage. He also took a Dale Carnegie seminar in public speaking and at age 21 was giving a night course at the University of Omaha on 'Investment Principles' - to 40-something professionals. Later, he went to work for Graham's investment fund in New York, but knew he wanted to work for himself, with his own fund, and back to Omaha.
Begun with his own capital and that of local Omahans, by the end of the third year the fund had doubled in value; after five years, when the Dow stock market index had risen 74%, Buffet's fund had increased by a remarkable 251%.
Before he was 35, Buffett was managing $22 million and had a personal net worth of $4 million (in the 1960s this was rich). Yet his life hardly changed at all. He continued to live in the same unimpressive house he had bought in the 1950s for $31,500, and asked his wife Susie to buy a better car than their VW because 'it looked bad when he picked up visitors at the airport.' His drab office accommodation was on the same street where he lived, and he worked in total secrecy.
A large part of Buffett's success was that he did not think like the crowd. The key to being a good investor was to recognise the value of things when 'everyone' knew they weren't worth much. He never worried if the market price of a stock he had bought experienced a big drop because it was obvious to him that the fundamentals would see it rise again.
Indeed, as the 1980s boom got underway, the shares that Buffett had bought 'dirt cheap' during the Nixon years of stagflation began to rise; by 1983 he had entered the Forbes list of richest Americans and his 'value investing' had begun to attract a lot of attention. In an off-the-cuff talk, he said:
Buffett is a risk-taker in the sense that he is often willing to bet a quarter of Berkshire Hathaway on one stock, but not a gambler because he looks only for 'sure-fire things'. Buffett imagined the stock market as like having a lifetime punch card and you were only allowed 20 holes. With such restricted choice, you would make sure that the stocks you did invest in were right. He would sometimes bet a quarter of Berkshire's capital on one stock, so sure was he that its true value would see the stock rise. The most radical thing about Buffett is that once he chooses a stock he hangs on to it. Selling a stock you had held for a long time, Buffett said, was "like dumping your wife when she gets old." In short, Buffett highlighted the difference between the true investor and the 'trader'. As Lowenstein puts it: "Buffett had always craved, and had always felt enriched by, continuity: to work with the same people, to own the same stocks, to be in the same businesses. Hanging on was a metaphor for his life."
In contrast to mutual fund supremos like Peter Lynch, Lowenstein observes, Buffett seems like something from another era. He has no computer in his office ('I am a computer' he once told an interviewer) or even a calculator, and spends most of his time reading (annual reports, newspapers) or talking with business partners and old friends. His 'one concession to modernity', the author notes, is a private jet dubbed The Indefensible. He acquired it only because he got tired of people asking him for stock tips when he was flying economy on commercial flights.
Buffett's favourite food is the cheeseburger, and he is famous for guzzling Cherry Cokes. Lowenstein says that his focus is so great that he either doesn't notice or doesn't have time for things that we normally associated with a well-rounded person. On a trip to Paris he wasn't the least bit interested in sight-seeing, and he would stay at his beachfront home in Laguna Beach in California for weeks on end without going near the water. He is continually amazed by the magic of compounding interest, and when his wife spent $15,000 on refurnishing their house, Buffett complained to a golfing partner, 'Do you know how much that is if you compound it over twenty years?'
For a self-made billionaire, Buffett is strangely liberal. He quit the Omaha Rotary Club (of which his father had been president) because he thought it racist and elitist, and also boycotted a local country club because it denied membership to Jews. Living in a predominantly white neighborhood, his household was also unusual in 1960s America in that he and Suzy often entertained black Americans.
When Buffett is asked what needs to be done to reform the welfare system, he prefers to talk about 'welfare for the rich'. He dislikes stock options for executives because they are over-generous at the expense of the shareholder. Many CEOs, with their hugely inflated compensation packages, were 'wards of the corporate state' - not true capitalists, he feels, but bureaucrats. Buffett also warned of corporate excesses a couple of years before Enron and other supposed corporate giants fell.
Although it needs updating to take account of Buffett's moves over the last ten years, why is Lowenstein's portrait of the great investor still so enjoyable? If you know nothing about investment, the book can educate you while telling a great story of one of the great minds of our time. Buffett is interesting because the way he lives and works is more akin to the style of an artist or philosopher; Berkshire is his 'canvas' and his relationship with his partners he sees as a sacred trust. Those who have invested with him tend to keep their shares for decades and consider themselves members of a 'privileged tribe', Lowenstein notes.
Before the Bill and Belinda Gates Foundation, The Buffett Foundation was going to be the richest charity in history, giving away at least $1 billion a year, but only after Buffett died. In the last couple of years, Buffett changed his mind and decided to give most of his fortune to the Gates Foundation, making it easily the largest ever created. Many were surprised, yet the move is consistent with Buffett's idea that the best returns come from leaving good people alone to do what they know best. Evidently, Buffett has great faith in his friends to heal the world of its many ills. Bill and Melinda Gates, in turn, have been humbled by what is effectively the gift of a lifetime's work.
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